Charging more, getting less: Lawyers’ biggest customers are discovering that they can haggle

Charging more, getting less: Lawyers’ biggest customers are discovering that they can haggle

Jan 18th 2014 | NEW YORK | From the print edition

THERE were groans in big companies’ legal departments in the mid-2000s, when the fees of America’s priciest lawyers first hit $1,000 an hour. Such rates have since become common at firms with prestige. A survey published this week by the National Law Journal found that they now go as high as $1,800. But the general counsels of large businesses are increasingly finding that they can ignore these extravagant rates, and insist on big discounts.

Price-discounting tends to be associated more with used-car lots than with posh law firms. There was a time when a lawyer could submit his bill and be confident of receiving a cheque for the same amount. In banner years, some even got more, as grateful clients tipped them a little extra for a job well done.

Since the financial crisis, however, the “realisation” of law firms—the proportion of their standard rates that they collect in practice—has been sliding. Earlier this month Peer Monitor, a company that tracks the legal industry, said that the ratio in the United States dropped from 92% in 2007 to an all-time low of 83.5% in 2013. British lawyers have seen a similar decline. “Discounts are rampant,” says Brad Hildebrandt, a consultant to law firms.

The economic forces driving high-flying legal eagles into the bargain bin are no mystery. Demand for corporate legal work on such things as mergers, takeovers and share and bond issues plummeted in the 2008-09 recession, and has yet to recover. Simultaneously, the easy profits once earned in litigation departments have also dried up: the tedious task of reviewing mountains of documents, which law firms used to farm out to battalions of newly qualified associates, can increasingly be done by computers.

Putting up prices at a time of weak demand and fierce competition seems perverse. Yet the industry has continued to increase its “sticker prices” by 2-3% every year—only to give back almost all the gain by offering ever-greater discounts.

One reason for this is that, as ever more big clients discover they can haggle, law firms have realised that the best way for them to start the negotiation is with the highest possible asking-price. In this, lawyers now find themselves in the same boat as accountants and other professionals who have long been used to having to bargain with bigger customers.

Another reason is that sophisticated legal services are somewhat like luxury cars and handbags, in that a high asking-price is taken as a sign of quality. No one wants to have hired the cheaper firm in a high-stakes lawsuit.

But perhaps the most important rationale for discounting is that it lets law firms charge different prices to different clients, depending on their willingness to pay. And even among business clients with big budgets, this varies markedly.

Over the past 25 years some large companies have built up their in-house legal departments, so that these can now deal with outside law firms on an equal footing. In-house lawyers know the market value of every type of service, and have sophisticated software that scrutinises invoices and queries anomalies. Such clients no longer just take the law firm’s word for how many hours its lawyers spent on a job: if the bill looks padded, they will not hesitate to demand cuts.

DuPont, a chemicals giant, has found plenty of scope for curbing its legal bills by becoming a cannier client. In the early 1990s it spread its legal work among 350 firms. Now it uses only 38—including some smaller firms in smaller cities, which offer better value for money. DuPont has persuaded its remaining law firms to work together more closely. For routine work it insists on flat fees; for riskier cases it seeks no-win, no-fee agreements. Above all, says Thomas Sager, DuPont’s general counsel, “We had to communicate that this is a new day, and you need to be as committed to our financial success as you are to yours.”

Law firms’ profits would evaporate if they offered smaller and less sophisticated clients such attractive deals. Fortunately for them, they have so far been able to get away with offering discreet, selective discounts. There are still a few big clients around who do not realise what they are missing: “If you increase the rate every year, some clients will make you take it back, but others will let you keep it,” says Tony Williams, a former managing partner of Clifford Chance, one of Britain’s biggest law firms. “Many general counsels could get an even better deal from their law firms. But they don’t appreciate their own bargaining-power.”